From Interest.co.nz comes news today that New Zealand is pushing ahead with a plan to develop macroprudential policy tools by the middle of the year:
Finance Minister Bill English says he expects to sign a deal with Reserve Bank Governor Graeme Wheeler by the middle of the year on the central bank’s so-called macro-prudential tools, but warns they won’t be a silver bullet to cool a hot housing market.
“The Reserve Bank and Treasury will finalise arrangements and I expect to sign off a memorandum of understanding with Reserve Bank Governor Graeme Wheeler by the middle of this year,” English said in a speech yesterday.
“There are some expectations that these tools will be used immediately to dampen the Auckland housing market. Those decisions will be in the hands of the Reserve Bank. The greatest influence on the housing market will remain interest rates and supply constraints created by the planning system.”
“Later this year, the Government will have more to say about how the financial stability tools will work alongside policies on more flexible supply in the housing market and social housing reform,” English said.
Among the tools under consideration include:
- Requiring banks to hold an additional capital buffer on their balance sheets during economic upswings;
- Requiring banks to hold additional capital against certain types of lending (e.g. mortgage lending);
- Adjusting funding ratios to require greater use of stable funding sources (e.g. term deposits instead of offshore funding); and
- Restricting high loan-to-value ratio (LVR) mortgage lending.
Mr English also insisted that decisions about macroprudential tools should be made by an independent Reserve Bank of New Zealand (the prudential regulator) rather than politicians.
The Real Estate Institute of New Zealand (REINZ) looks to have already commenced a scare campaign against the proposals, today warning that first home buyers would be pushed out of the market if banks are forced to require bigger deposits:
Real Estate Institute CEO Helen O’Sullivan is wondering how those loan-to-value ratio proposals will be implemented.
She says there’d be concern if all types of buyers are treated the same.
Helen O’Sullivan says it would be wrong to apply the same approach to a first home buyer as to someone who’d been in the market a long time.
unconventionaleconomist@hotmail.com
Does the RB of NZ guarantee their banks or does it fall back on the RBA as NZ banks are Aust Banks ?. In which case the Kiwi’s are pretty clever
Yes, and no. There is an implicit guarantee, as ‘our’ banks are mostly Australia banks (would Aussie allow one of their bank’s NZ subsidiaries to fail?), but the RBNZ is working towards an Open Bank Resolution policy. A bank fails, it’s let go, and it is managed down at the expense of the creditors – which includes the depositors. That policy is due for implementation about now.
http://www.rbnz.govt.nz/finstab/banking/4430900.html
Thanks for the links.
NZ is telling its foreign owned banking system and its lenders that they are on their own.
They are also not offering depositors any comfort:
“Depositors are exposed to losses once shareholders and subordinated creditors funds are exhausted.”
I would argue that for a small reduction in interest rate depositors ought be able to get a preferred position or for a small fee government guarantee.
The only other thing I would suggest is that there ought be an option for the long term debt/liabilities to be bailed in as equity and to reconstitute the board and management.
I would suggest depositors take their money out of Australian banks and put it into local banks such as credit unions etc… that don’t have so much risk. The Australian banking system is exposed and has private debt of a few trillion dollars. This is a high risk in a global economy with the EU falling apart and the US printing money forever.
I think it’s a step in the right direction, governments should not prop up banks ever. Deregulation of banks allowed banks to take on large risk, knowing the government would back them. I have been looking around for a while to take my money out of the big four.
A couple of reasons, first if I use a credit union or local bank I know I will be supporting local people, the Big4 are outsourcing so much these days, including computer programmers. You would be horrified to know that ANZ’s infrastructure administration is outsourced to Manila. Even local security teams in Australia had been getting passwords reset by people in the Philippines. But the point is, the banks take jobs away.
Second as stated is the growing risk of these banks, their profits are off the banks of mortgage debt, and I believe a bust in property will happen, more so because the EU can’t hold it together, it’s getting a lot worse and the knock on affect such as China’s second biggest trading partner will catch up to us sooner or later.
Job losses mount in Australia, QBE and other big companies are in a race to outsource more and more, which means even greater job losses, it’s like Austerity but it’s done by outsourcing, not government, oh, plus government austerity.
I don’t think higher loan-to-value ratio requirements alone will make much difference to speculators but it will lock out some FHBs.
A speculator would still be able to sell his home and manage tu buy 5 other homes even if LVR is limited to 80%. On the other hand FHBs have no chance of buying because they have no money to compete with these speculators.
Gov needs to restrict how much banks can lend to a person in terms of multiples of income and make rules how income should be calculated.
any removal of credit induced demand will deter speculators as:
- some speculators ARE highly leveraged
- less FHBs will put downward pressure on prices and reduce incentives for speculators to be in the market
So downward pressure will certainly be exerted on prices which is ultimately good news for FHBs, especially the prudent ones who save. Further price stabilisation will also increas the incentives to save as there is less concern of the market running away from a FHB’s ability to save.
As S suggests, who will the speculators sell their houses to, to be able to buy 5 more? Plus, if the LVR changes, any re-financing will be subject to the new rules. What was re-financed last time at 90% LVR might not get done so easily at 80%. In that case property will have to be sold ( again, who to!) to meet the new ratios.
your last point is worth considering as another to add to a toolbelt, however I see some potential for people to manipulate income figures. Although the incentive to manipulate may be restricted due to it not being a speculators market.
On your other points, thats stage 1 thinking, as the other 2 posters have illustrated
I wonder whether another tool might be to more formally recognise the ownership pork pies that go on in these booms. For instance where a person takes a property with an interest only loan that is unlikely, on the facts, to ever be repaid in a reasonable time then it is not properly characterised as a loan, but a lease.
The bank in this case is not a mortgagee but in substance an owner. The corporate tax provisions have long since be amended to stop corporates playing these games with each other.
The greatest influence on the housing market will remain interest rates and supply constraints created by the planning system
Once the supply constrain issue has been acknowledged I know I am dealing with a person with a functioning brain who most likely eats noodles with two chopsticks.
Once this is established I am more than willing to discuss “macroprudential policy tools” to deal with the housing disaster.
One thing that could be considered is forcing banks to use the same margin lending system for both stocks and houses. The bank would be forced to revalue the houses regularly and demand cash payments should the price of the house drop. Margin accounts have been wonderfully successful in limiting the amount of lending for stocks. Perhaps they could similarly crimp housing speculation.
The interest rate for margin lending is also successful in limiting the amount available for stocks – current rates are about 8% – so a 5% margin on the overnight rate.